JIM LEHRER: More on the Enron matter now from Ehud Ronn, professor of finance and director of the Center for Energy Finance at the University of Texas at Austin; John Coffee, professor of securities law at Columbia University; and Loretta Lynch, a former US Attorney for the eastern district of New York.

Professor Ronn, first on the criminal investigation by the Justice Department, potentially what are the crimes that might have been committed through the collapse of Enron? What are they investigating, in other words?

EHUD RONN, University of Texas: My understanding, Jim, is what they’re looking at most profoundly is the issue of the accounting disclosures. As you know, there are a lot of issues having to do with the Enron collapse. There are business issues, there are ethics issues.

With respect to the legal issues I believe they’re focusing on whether proper accounting disclosures were made, and if not, why did they not make those disclosures?

JIM LEHRER: Disclosures of financial trouble, correct?

EHUD RONN: I would define them more as disclosures of the relationships between Enron and the so-called special-purpose entities that Enron had set up to avail itself of their capital. I think it’s those disclosures that they’ll be looking at very carefully.

JIM LEHRER: Now, Ms. Lynch, how could those be possible criminal violations?

LORETTA LYNCH, Former US Attorney: Well, the issue really is whether or not there were any material misrepresentations that rise to the level of criminal fraud. Were people defrauded? Were false statements made to the government in any other filings that were produced by Enron to the Securities and Exchange Commission or to any other government entities or regulators?

One of the things the Department will be looking at is when the disclosures were made, why were they made and why were the initial decisions to move those particular losses off the books made?

JIM LEHRER: Now, Ms. Lynch, one of the allegations here is that the company was failing, or the company was losing money, had severe financial troubles, but it did not tell not only the government, it also didn’t tell its employees. When and where does that become a violation of federal law?

LORETTA LYNCH: Well, it depends upon how the company was presenting itself during that time period. If in fact it was putting forth information that its finances were other than they really were and people were relying upon those, it could give rise to criminal liability, wire fraud, mail fraud, certain other false statements. Depending upon its relationship with the shareholders, there could also be violations of its fiduciary obligations to them, as well.

JIM LEHRER: John Coffee, what would you add to that, in terms of what the possible criminal problems here could be.

JOHN COFFEE, Columbia University: It’s not hard to come up with a scenario for criminal prosecutions. We have at least some indications that the books were cooked because the company has already restated its earnings by $500 million. And we also have a lot of allegations…

JIM LEHRER: Restated its earnings meaning it said it earned $500 million that it in fact did not earn?

JOHN COFFEE: Over three years, which is a long period of time. The company said, “we got it wrong.” And the auditors said “we made an honest mistake.” But as the pressure gets added by a criminal investigation, we may see the auditors telling us that they were lied to by management, and that becomes a fraud case.

JIM LEHRER: Now, who is we? Who’s management? How do you define management? If the company, as a company, made false statements to any of the folks along the lines of what Ms. Lynch just said and Professor Ronn, who’s criminally liable?

JOHN COFFEE: Anyone who either falsifies documents, makes a false statement to a government agency or anyone who helps prepare a false statement. If you knowingly aid and abet a violation, you are criminally liable under federal criminal law.

The government can also charge a conspiracy, possibly a conspiracy including both Enron, its auditors and others. All of that requires proof. But if you can show that people deceived the auditors or deceived the SEC or deceived shares holders about material information, you have essentially proved the core of a securities fraud case.

JIM LEHRER: But if let’s say you’re the boss and I’m your number two, I actually do the bad things, I don’t tell you about it, I start to tell you about it and you say, “no, I don’t want to hear about it,” are you still criminally liable?

JOHN COFFEE: Well, it’s a technical point, but willful ignorance is the same thing as having knowledge. If you deliberately avert your eyes so you don’t learn the damaging fact, we could have that knowledge attributed to you. That’s a very established point in criminal law.

But I don’t think it’s going to work that way. I think we’re going to have people like auditors and others who will cooperate with the government. Once the pressure of criminal charges is out there, there is often a race to see who can be the cooperating witness and who can thereby cut the first deal. And there are many who will want to do that.

JIM LEHRER: Now, Professor Ronn, you have said that October 16 is a magic date in this. Explain why, in terms of who’s liable, who isn’t liable, who might be guilty of something and who may not be.

EHUD RONN: Sure, Jim. One of the things I wanted to point out to you as you were discussing with your colleagues is that one of the things that is in dispute is what Enron told its auditors, and so I think that’s one of the things that the government, both Justice and the SEC, will be looking into. With respect to October 16, I sort of divide the world into pre-and post October 16. Prior to October 16, you had the…

JIM LEHRER: What year are we talking about? You’re talking about last year, right?

EHUD RONN: Yes, 2001, right. You had the decline in value due to a number of factors. You had California, the slowdown in deregulation…

JIM LEHRER: You’re talking about the energy problems that California was having, right.

EHUD RONN: Indeed. And the ramifications that they had with respect to the slowdown of deregulation elsewhere. …You had cap prices imposed on California, which reduced the profitability of trading. You had the recession, which lowered the demand for energy products, and hence, the level of prices.

You had two Enron-specific issues: Their investment in water, the Azurec’s investment, and the bandwidth investment, both of which turned out to be negatively valued investments. So all of those issues were partly macro and partly company-specific.

JIM LEHRER: Excuse me. But to make sure we understand a frame of reference, the stock had been at its high up in the 80s and the 90s, and then on October 16, it had gone down to 30 dollars a share. Your point is that you could make the case that those were all legitimate kinds of things that happen in a marketplace for that drop, right?

JIM LEHRER: But then different things started happening after October 16, right, under your theory?

EHUD RONN: Right. What I think there is that basically you had these revelations with respect to conflict of interest and perhaps more important, with respect to the credit worthiness of Enron.

And that I would submit to you, eviscerated the value of Enron because it caused people to stop trading with them, which was the very source much Enron’s profitability. So that’s the post-October 16 event.

JIM LEHRER: That’s what he it went from $30 a share down to less than $1?

EHUD RONN: That’s correct.

JIM LEHRER: Yeah. Now, Ms. Lynch, the additional issue here, the one the President talked about today in specific terms but also in general terms, are the pension funds, which is separate in one way at least from the criminal investigation. What’s at stake there?

LORETTA LYNCH: Well, what’s at stake is the huge amount of money that Enron employees poured into those pension funds. My understanding is they had very few options but to buy Enron stock. They were also prohibited from selling that stock while corporate directors and officers were able to do so and make a profit.

There’s a real issue there as to fundamental fairness, number one. If there’s any criminal liability involved, you have to look and see whether or not, again, there was fraud involved in the way the company dealt with its employees in putting them into that particular pension fund. That’s an issue that’s going to go beyond this case and, in fact probably beyond this company.

Other issues obviously are whether or not the officers and directors knew about the company’s problems and its impending devaluation while they were engaged in selling the stock.

JIM LEHRER: Now, that’s a big deal, isn’t it, Professor Coffee, I mean in terms of particularly the pension funds — that’s what… Thousands of employees for Enron lost their pension equity, lost everything. At the same time, their bosses were selling their stock, but they couldn’t sell their pension stock, right? Why not?

JOHN COFFEE: That’s what the public is so mad about. The public is intensely angry because this is a case that looks like the captain of the “Titanic” jumping into the lifeboat while he locks up all the crew down in steerage. And that’s something the public does understand and it’s created a firestorm. And I think we’re likely to see some legislation trying to change the nature of what are called 401k plans.

JIM LEHRER: Is it illegal under the law today what they did, if they in fact did this?

JOHN COFFEE: The only thing that could be illegal is if you assume that management had material, nonpublic information about the decline of the company.

JIM LEHRER: That’s Ms. Lynch’s point.

JOHN COFFEE: That’s insider trading if you do that. But there is no evident criminal prohibition on designing with a 401k plan today that restricts transferability by the employees.

JIM LEHRER: Just a quick thing, Ms. Lynch, on this issue that was revealed today that Kenneth Lay, the CEO of Enron, called two cabinet secretaries and said, “uh-oh, we’re about to go bankrupt” — on the surface, is there anything there that smells illegal or is illegal?

LORETTA LYNCH: Well, on the surface, it really could be nothing more than someone who is a large player in a major industry wanting to go alert the administration that there could be something that could affect the economy. The issue would be whether or not he asked for any government intervention, any particular help, any bailout. And so far, I haven’t heard anything about that.

JIM LEHRER: Yeah. Professor Ronn, would you agree with that? In order for there to be something illegal here in terms of some connection between the large contributions to the Republican Party, or Governor Bush when he was a governor or President Bush… Or candidate for President Bush… Anyhow, you know who I mean. …There would have to be some quid pro quo in addition to just the contributions, correct?

EHUD RONN: I think so, Jim. I think there are two sort of public policy issues. One is the issue of what we call corporate governance, the issue of conflict of interest within the firm. You’ve not yet alluded to that. The other one is the reference, the comparison of Enron to long-term capital in 1998.

I think we do want our cabinet secretaries, the federal government, to be aware of things that might have systemic risk issues. And so they can make a judgment call on whether they want to intervene, but that is something they should be apprised of as part of their duties.

JIM LEHRER: Professor Coffee, what about today’s word from the accounting firm, Andersen, that they… Uh-oh, they may have thrown away some of the documents involved in the Enron matter? What does that… How does that sound to you?

JOHN COFFEE: It sounds quite extraordinary. It’s as if a Hollywood scriptwriter were writing a new chapter every day for a soap opera. I can imagine that you could lose some documents, but accountants are in the business of keeping their work papers, and they know that that’s the only way they can genuinely establish a defense and show that they were deceived, as opposed to in on a conspiracy.

JIM LEHRER: Well, just today, in the news summary at the beginning tonight and then Spencer Michels in the intro to our discussion went through just what happened today, developments in the Enron story. Do you foresee a lot of similar developments coming? Has this story got a long way to run?

JOHN COFFEE: I think there’s a firestorm of public interest. I’ve seen lots of corporate scandals, they’re sort of my specialty. And you can go all the way back to Drexel Burnham and not see a case…

JIM LEHRER: Refresh our memory on Drexel Burnham.

JOHN COFFEE: Drexel Burnham was a very big investment house that eventually failed but it invented junk bonds and changed the course of American banking in so doing but it was prosecuted along with Michael Milken for a variety of securities fraud offenses. That’s probably the next largest scandal that the public can remember. And this is looking like it’ll be even larger than that in terms of interest.

JIM LEHRER: Does it look that way to you, Ms. Lynch?

LORETTA LYNCH: It certainly could be. I think we have some very, very troubling issues here involving the movement of huge losses on and off the books, the treatment of shareholders, the treatment of employees, and particularly when the corporate directors and officers were aware of the problems that led to the devaluation of the stock. As soon as the accounting was corrected, for example, I believe the bond status fell down to junk. So clearly it had a material effect on that. It’s very troubling.

JIM LEHRER: Professor Ronn, in a word, troubling to you, as well? Or do you see trouble down the road? We’ve just begun down a very long road?

EHUD RONN: It is a long road, but I think I would compare it most recently to long-term capital in which the New York Fed intervened in order to address the issues of systemic risk and I think that’s the story you’re comparing the discussion between Ken Lay and the cabinet secretaries to.

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